Net access tax compromise: A short extension?

A temporary extension of the Internet access tax restrictions seems likely, but what about the idea of making the tax ban permanent?
Written by ZDNET Editors, Contributor
WASHINGTON--A political compromise could temporarily, but not permanently, renew the Internet access tax ban when it expires on November 1.

At a hearing convened Thursday by a U.S. House of Representatives Judiciary subcommittee, a National Governors Association lobbyist said his group would support a "reasonable"--as opposed to infinite--extension of the ban, provided that it makes clear what services states can and cannot tax and gives them the freedom to collect taxes that were in effect before Congress adopted the original 1998 federal ban.

"It sounds like just about everybody's in agreement mostly that we've got to extend the moratorium and perhaps make it permanent," remarked Rep. John Conyers (D-Mich.), the chairman of the House Judiciary Committee.

At issue is a federal law that generally bars local governments from taxing Internet access bills, such as DSL (digital subscriber line), cable modem and BlackBerry-type wireless transmission services. The law doesn't address collection of sales taxes on e-commerce, but it does dictate that products sold online can't be taxed at a different rate than those in brick-and-mortar stores.

If the law expires, monthly bills for Internet service could be laced with the confusing taxes, recovery fees and surcharges that one typically associates with phone bills.

A similar political tussle over whether to make the original 1998 law permanent broke out four years ago and ultimately led to enactment of a compromise bill that set the November 2007 expiration date.

It was not immediately clear on Thursday, however, whether supporters of a permanent ban would be willing to back down so easily.

"Keeping Internet commerce and access free from discriminatory taxes has been a success in the American economy," said Rep. Chris Cannon (R-Utah), the subcommittee's ranking member, adding that he hoped the panel will soon pass pending bills that would make the ban permanent.

Defining "Internet access"
Rep. Anna Eshoo (D-Calif.) made a pitch at Thursday's hearing for one such bill that she introduced earlier this year. Called the Permanent Internet Tax Freedom Act of 2007, it currently counts 136 co-sponsors but has not yet gone up for a vote.

"This is the certainty that innovators and start-ups are looking for and which only a permanent moratorium can provide," Eshoo, whose district includes part of Silicon Valley, said at Thursday's hearing. She credited the moratorium for rendering the Internet "an integral part of everyday life" and warned that changing course could discourage companies from offering broadband access to every American.

A proposal by Rep. John Campbell (R-Calif.), who also happens to be one of the co-sponsors of Eshoo's bill, would also make the ban permanent. But unlike Eshoo's version, it would also get rid of a so-called "grandfather clause" that allows states to continue taxing Internet access if they already had such policies in place before the 1998 federal moratorium was enacted. Campbell said he preferred his approach but would accept Eshoo's as well.

Some Democrats on the committee suggested the tax ban should be even broader. Rep. Steve Cohen (D-Tenn.) suggested it might be a good idea to prohibit taxes on "basic" cable service. That idea, however, drew immediate bristling from the NGA's David Quam, who argued such authority "has got to remain with state and local officials."

Rep. Zoe Lofgren (D-Calif.) said she wondered if the definition of "Internet access" in the moratorium bills should be made even broader in an effort to ward off loopholes leading to taxation Congress didn't intend, particularly Internet backbone services. Campbell and Eshoo both said they were open to that idea.

That definition has also proved a sticking point among the various state officials and Internet service providers. But Meredith Garwood, a vice president of tax policy for Time Warner Cable who spoke on behalf of a coalition that supports a permanent tax ban, told politicians that her group and the NGA have come up with a proposal for a "compromise" definition. By their description, it is designed to ensure that Internet backbone services aren't taxed while making it explicit that just because a service is bundled with Internet access doesn't mean it's exempt from tax.

The NGA's Quam said the agreement in no way makes a permanent ban attractive to states and localities. "Keeping the moratorium temporary is vital to continue to honor state and local sovereingty with regard to this issue," he said, and would "allow Congress to return to this issue and make sure we've gotten it right."

State and local officials prefer a Senate bill proposed in late May by Sens. Tom Carper (D-Del.) and Lamar Alexander (R-Tenn.), which would extend the ban for only four more years.

Even if the Internet access tax ban is ultimately extended, some politicians were already eager to pursue new ways of encouraging states to collect taxes. Rep. Bill Delahunt (D-Mass.) said he is concerned states are losing billions of dollars in revenue because of e-commerce operations failing to collect sales taxes. He made another push on Thursday for passage of a bill designed to get more companies to collect sales taxes from customers in states where they don't have a physical presence. The Judiciary subcommittee is planning to hold a hearing on that effort soon, Delahunt added, although he didn't specify when.

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